Imagine your brokerage sends you a routine message asking you to name a “trusted contact,” a person the firm can reach out to if it ever suspects you have been defrauded or are showing signs of cognitive decline. It costs nothing, adds a layer of protection, and takes about a minute. Most people, it turns out, never do it.
That gap between a simple safeguard and actual behavior sits at the center of a study published in the Journal of Behavioral and Experimental Finance. The research examines who signs up for this protection, who gets asked to serve as someone else’s trusted contact, and why financial knowledge alone does not reliably push people to act.
A voluntary safeguard that most people skip
In 2018, the Financial Industry Regulatory Authority (FINRA), the self-regulatory body that oversees U.S. broker-dealers, put Rule 4512 into effect. The rule asks brokerage firms to make “reasonable efforts” to collect the name of a trusted contact for each retail client. That contact can be alerted if the firm spots suspected exploitation, fraud, or mental decline. Designating someone is entirely optional, and skipping it does not affect your account. It is what economists call a nudge: a low-friction prompt rather than a mandate.
Ioannis Petrakis of Northumbria University in the United Kingdom set out to understand why uptake has stayed low. Drawing on the 2021 National Financial Capability Study, a nationally representative survey run by the FINRA Investor Education Foundation, he found that fewer than 38 percent of eligible investors with non-retirement accounts had ever named a trusted contact. About 22 percent reported having been named as one by someone else.
Petrakis treats the decision as a form of precautionary financial behavior shaped by several forces at once: how much attention people can spare, how financially capable they are, how complicated their investments are, and how much they trust the people and institutions around them. He also studies both sides of the relationship, meaning not only whether someone names a contact but whether they are chosen as one, which he interprets as a signal of perceived reliability within a person’s social network.
Untangling knowledge from everything else
The analysis covers 2,824 active retail investors. Petrakis’s main measure of financial knowledge is a standard four-question quiz covering compound interest, inflation, investment risk, and how bond prices move. The average respondent answered about two of the four correctly.
Measuring the effect of financial literacy is tricky because knowledge tends to travel with other traits. People who score well on financial quizzes may also be more organized, more engaged with their money, or more likely to consult advisors, and any of those things could independently drive them to name a contact. A simple correlation would blur cause and effect.
To get around this, Petrakis uses a technique called an instrumental variable. The idea is to find something that influences financial literacy but has no direct path to the outcome being studied. His instrument is whether a person attended high school in a state that required personal finance coursework. These mandates were set by state legislatures, often decades before Rule 4512 existed, so they plausibly shaped adult financial knowledge without directly affecting whether a middle-aged investor later names a trusted contact. To guard against the possibility that mandate states simply differ in other ways, he also controls for how many colleges and universities a state has, a rough gauge of its broader educational environment.
What the numbers revealed
When Petrakis ran a plain statistical model, financial literacy showed almost no relationship with naming a trusted contact. That near-zero result, he argues, reflects the tangled biases described above.
Once he applied the instrumental-variable approach, a different picture emerged. Each additional correct answer on the four-item quiz was associated with a roughly 6 to 11 percentage point increase in the probability of naming a trusted contact. He interprets this as evidence that financial knowledge lowers the mental cost of engaging with an unfamiliar safeguard. The same pattern held for being named by others: more financially capable people were more likely to be chosen as someone else’s trusted contact, which the author reads as a sign that financial competence functions as a reputational signal within networks.
Portfolio structure mattered too. Investors with more diversified holdings, larger balances, cryptocurrency exposure, and non-risky assets like bonds were more likely both to name a contact and to be named as one. Petrakis suggests that more varied or higher-stakes portfolios raise the visibility of what could be lost, making protective tools feel more relevant. He also finds that knowledge and portfolio engagement reinforce each other: the effect of a bigger, more diversified portfolio was larger among investors who scored higher on the literacy quiz.
The trust-privacy trade-off
The most distinctive finding concerns social capital, a term for the trust, norms, and network ties that bind a community together. Petrakis measured it at the state and regional level and examined whether it changed how financial literacy relates to behavior.
The relationship flipped depending on the setting. In low-trust environments, financial literacy was weakly related, or even negatively related, to naming a trusted contact. In high-trust regions, literacy became a strong positive predictor of both naming and being named. Adoption itself varied widely across the country, exceeding 50 percent in the South Atlantic and falling below 30 percent in Mountain states.
Petrakis calls this a “trust-privacy trade-off.” His interpretation is that in places where trust is thin, more financially savvy people may actually become more cautious, weighing the risks of handing over information, family conflict, or misuse of financial access. Where social ties are strong and delegation feels safe, that same knowledge translates into action. As he puts it, “financial competence translates into delegation only where social networks make delegation credible.”
The author ran several checks to test whether the 2021 timing, with its pandemic volatility and surge of first-time “meme-stock” investors, might be distorting things. He constructed an indicator for people who started investing between 2019 and 2021 and found that this group was not driving the results. The literacy effect held among investors who had entered markets earlier, which he reads as consistent with the idea that naming a contact reflects slow-building capability and social context rather than a short-term reaction.
What it suggests for policy and investors
Petrakis argues that a light-touch nudge like Rule 4512 does not operate in a vacuum. Its effectiveness appears to depend on financial capability and the surrounding social environment working together. In high-trust, financially engaged settings, a gentle prompt can be enough. In low-trust settings, he suggests, the same prompt may fall flat or even prompt reluctance among the most knowledgeable investors.
From that reading, relying on firms’ “reasonable efforts” alone is unlikely to produce even protection across the population. The author suggests that pairing prompts with financial education, community-based trust building, or advisor-mediated conversations might narrow the persistent gaps in adoption.
A few caveats are worth keeping in mind. The data are cross-sectional, capturing a single snapshot rather than tracking people over time, so the study explains differences in accumulated behavior rather than the moment-to-moment path of adoption. The causal claims rest on the strength of the instrumental-variable strategy, and the trust measures are regional rather than individual, meaning a person’s own outlook may differ from their state’s average. Still, the work offers evidence that turning financial knowledge into protective action is as much a social process as an individual one.
